The effect of crop yield and feed price variability on profitability of dairy farming in Virginia :a target MOTAD approach

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Abstract

Dairy farming in Virginia could be more profitable if price and yield risks affecting the cost
and availability of feed inputs such as corngrain, corn silage, alfalfa and ryelage are reduced. Price
and yield risk facing dairy farmers in Virginia can be reduced through a marketing strategy like
hedging and government commodity program participation. The overall objective of this study is
to evaluate how the variability of price and yields of particular feed crops affect the variability of
expected returns in dairy farming. Specific objectives include: 1) to evaluate the relationship between feed production risk and the level and variability of net returns for a representative dairy farm
in Virginia; 2) to evaluate the relationship between price risks of purchased feed inputs and the
variability of net returns; 3) to draw implications from the results that can be used to help dairy
farmers better manage feed production risk. To accomplish these objectives, the target MOTAD
risk analysis technique is used.

The empirical model is developed in four steps. First, the model activities such as milking and
feeding of cows, heifer and calf activities, crop production, harvesting, labor, and buying and selling
activities were created. Second, variable yields based on probability elicitation from dairy farmers
were generated. Third, variable prices based on commodity options were generated; and fourth a
target income constraint was derived.

Results from the analysis indicated that the target income constraint was exceeded in every
state of nature for the representative farm resulting in an efficiency frontier of a single point. Increasing
the assumed debt-asset ratio and annual debt service requirement, resulted in a risk-return
tradeoff with lower levels of risk (measured as mean deviation below target or MDBT) being obtained
at the expense of lower levels of expected returns.

At a higher debt asset-ratio, when the mean deviation below target (MDBT) was varied over
a range of values, the quantity of crops harvested also varied. The average harvested acres of alfalfa
and corn silage increased as the MDBT increased while the harvested acres of corn grain and ryelage
decreased. Alfalfa harvest is increased because less forage in terms of ryelage is harvested and the
average quantity of corn grain decreases as the MDBT increases because more com silage is grown
in place of the costlier but less risky ryelage.

The results show that hedging and participation in the government feed grain program could
lead to effective risk reduction and increases in expected returns for the dairy farmer. Government
program participation increased expected returns at all debt-asset ratios. Both government programs
and hedging reduced risks at higher debt-asset ratios. Government program participation led to
larger gains in expected returns as the availability of land increased.